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Thursday, 30 July 2015

A few more charts from today's earnings frenzy: AB InBev, Bunge, Royal Dutch Shell

AB InBev is the world's largest brewer but with the shares sliding nearly 5% today (below US$120/share) as I write it is not having the best day.

So why so? Well due to a combination of weather, some difficult comps (versus the World Cup last year in Brazil) and some very messy net finance results (more of that below) investors were a little underwhelmed.

The better news is that the company is still generating cash and deleveraging. Free cash flow is now running at more than 5% of EV (let alone market cap) and the net debt to ebitda ratio is nicely compressing.

Back to the finance results. The reasons may be the well-known (FX) as well as the specific (hedge payments on incentive programs etc.) but it did not go down well given the shares c. x16 EV/ebit profile.

My view is that the AB InBev story is still a medium-term winner and that c. x14s EV/ebit US$110 level is kind of interesting (and exhibits some technical support). Sharp management, strong cost control and leading market positions equals to success over time. The question will then become - as the deleveraging gathers pace - what will they do next?

It has been a while since I looked at the agribusiness Bunge but I noted last year (link here) that: '...for x17 current EV/ebit and a relatively modest c. 1.5% dividend yield? I like the theme but prefer to wait for a cuter entry level at least in the US$70-75 range'
That is potentially prescient as Bunge shares today have fallen to just above the US$80 level with a failure here opening up the low/mid US$70s level that the shares traded at for much of 2013-14:

Numbers were not the greatest for Q2 in an area which is notably lumpy with all divisions worse than the equivalent period in 2014.

YTD the agribusiness has been better than in 2014 and this remains by far the best part of their business and still is generating positive ROIC-WACC. However elsewhere the troubles in the Brazilian economy is hitting the food/ingredients and sugar/bioenergy divisions as noted in the slide below. A H2 weighting of results just heightens execution fears.

In terms of a 'flag level' for me my comments from last October still hold sway.

Finally I noted in the large energy company space the workable dividend sustainability/gearing combination for BP. How is their great peer Royal Dutch Shell getting on? The most striking aspect of their presentation document was the unchanged dividend guidance (even for 2016) AND a buyback plus the ongoing capex / general cost cutting which is assisted by the BG Group deal completion.

As with BP not everything on these metrics is perfectly rosy with divestments still required to full cover from cash flows capex, dividends and buy backs.

I was also quite impressed by this relative to peers operating cost performance data:

Finally it was noteworthy too that the combination with BG Group is viewed as an opportunity to assist in further capex cuts.

So not easy but given the 6%+ yield that Shell is committed to for the next couple of years plus everything else noting above, for the shares to rise from their current 1870p level to 2000p+ again does not seem extraordinary to me. There is value from a reasonable time basis perspective in the larger cap energy and related space.